Improving Security of Payment Building and Construction Industry

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4. Trusts Page 45National Public Works Council IncImproving Security of Payment in the Building and Construction Industry- deemed to be held in trust and- held in a formal trust account?(i)BankruptcyWhere the trustee of the trust is a natural person it appears that the trust assetsdo not vest in the Trustee in Bankruptcy, ie the Trustee in Bankruptcy wouldnot have any rights to the monies held in trust. Accordingly, the monies heldin trust would be able to be disbursed to the beneficiaries in accordance withtheir respective rights. Monies paid to Subcontractors would not beconsidered a preference payment. If there was a shortfall in payment of theamount owed to a Subcontractor, then the Subcontractor would be able toprove in the Bankruptcy for the shortfall.Property held in trust for another is exempt. Section 116(2)(a) of theBankruptcy Act explicitly excludes property held by a bankrupt in trust foranother person. The trust property must be capable of being distinguished (ieidentifiable) from other property of the bankrupt. The trust property remainsvested in the trustee subject to the normal claims by creditors as set out in theauthorities.
4. Trusts Page 46National Public Works Council IncImproving Security of Payment in the Building and Construction Industry(ii)LiquidationThere is no statutory exemption for trust monies given pursuant to theCorporations Law. However, individual items of trust property are exemptunder the general law.When a company is the trustee holding monies in trust and is subsequentlyplaced into Liquidation, the trust property is not available for distribution togeneral creditors. A beneficiary, unlike a creditor, can stand outside theliquidation and assert an equitable proprietary interest in the trust property,unaffected by general creditor claims.(iii)Application to both Bankruptcy and LiquidationThe trust property must be capable of being distinguished from other propertyof the individual or company. If the trust funds have been dissipated, then noproperty remains exempt. Trust creditors have no exclusive claim to otherproperty of the bankrupt or insolvent company. The need to identify trustproperty gives rise to the procedure of tracing trust property into otherproperty to which it has been converted, as the converted property remainsexempt. Where those monies cannot be specifically identified pursuant to atrust, a dispute may arise as to whether those monies are monies of theindividual or company or the Subcontractor.If trust property is somehow mixed with the bankrupt's or company's ownproperty, it has been settled in Frith v Cartland (1865) 34 LJ Ch 301 that thewhole of the property would be treated as trust property, except thatspecifically distinguished as non-trust property. If money was held by thebankrupt or company in a fiduciary capacity and was paid into a simple bankaccount, the claimant should be able to trace the monies. Accordingly, themonies would then, in effect, be charged and available to settle any accountowing to the claimant. If a Bank then mixed funds with the bankrupt's orcompany's own monies and the bankrupt or company subsequently drew uponthe mixed account, the effect of the decision in Re Hallet's Estate; Knoathbullv Hallet (1879) 13 Ch 696 means that the bankrupt or company will bedeemed to have taken out his own monies in preference to the trust money.However, as was held in Roscoe Ltd v Winder (1915) 1 Ch 62 the trustmonies in the account can only be represented by the reduced balance.It makes no difference whether the monies are deemed to be held in trust orare held in a formal trust account. Where there is a mixing of funds withoutproper identification of those funds, problems will always arise in theeventuality of a liquidation or bankruptcy.Accordingly, it is clearly preferable to have a requirement that monies held intrust shall be specifically held in a separate trust account with theidentification of those monies earmarked for a specific Subcontractor.
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Improving Security of Payment Building and Construction Industry

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